Itta/38/1999 Of Commissioner Of Income Tax/Vizag v. M/S.artos Brewiries Ltd

HONOURABLE THE CHIEF JUSTICE SHRI MADANB.LOKURANDHONOURABLE SHRI JUSTICE SANJAY KUMAR INCOME TAX TRIBUNAL APPEAL Nos. 38 OF 1999,46 OF 2000 & R.C.NO.31 OF 2000 Dt: 03-01-2012. ITTA No.38 of 1999 Between: The Commissioner of Income-Tax, Visakhapatnam .. APPELLANT AND M/s. Artos Breweries Ltd.,Ramachandrapuram, East Godavari District. .. RESPONDENT HONOURABLE THE CHIEF JUSTICE SHRI MADANB.LOKURAND HONOURABLE SHRI JUSTICE SANJAY KUMAR INCOME TAX TRIBUNAL APPEAL Nos.38 OF 1999,46 OF 2000 & R.C.NO.31 OF 2000 COMMON JUDGMENT : (PER HON’BLE THE CHIEFJUSTICE SHRI Madan B. Lokur) In these two appeals as well as referred case thefollowing substantial question of law has arisen forconsideration: “Whether on the facts and circumstances of thecase, the Tribunal was justified in holding that theroyalty paid by the assessee-company toM/s.Mohan Meakins Breweries was in the natureof revenue expenditure?” 2. The assessee was in the business of manufactureand sale of beer. The assessee used to manufacture beerunder the name and style of “Golden Eagle”, which is thepopular brand name of M/s. Mohan Meakins BreweriesLimited., Solan, U.P. (for short ‘MMB’). 3. The assessee entered into a Technical AssistanceAgreement dated 7.2.1979 with MMB. Some of the clausesAgreement dated 7.2.1979 with MMB. Some of the clauses of the Agreement are as follows: “i) MMB (Mohan Meakins Breweries) grants, forthe term of the agreement, an exclusivelicence to Artos to use the know-howsupplied by MMB for the manufacture of theproducts at the plant and for this grant oflicence Artos shall pay MMB a royaltycalculated at the rate Rs.1/- (rupee one only)per case on all products produced at theplant. Case shall constitute 12 bottles of 650ml each.the term of the agreement, an exclusivelicence to Artos to use the know-howsupplied by MMB for the manufacture of theproducts at the plant and for this grant oflicence Artos shall pay MMB a royaltycalculated at the rate Rs.1/- (rupee one only)per case on all products produced at theplant. Case shall constitute 12 bottles of 650ml each. ii)MMB grants licence to Artos to sell in Indiaunder MMB trade mark the productsmanufactured at the plant in accordance withthe know-how provided. For this, Artos shallpay MMB royalty calculated at Rs.2/- percase of product sold by Artos under MMBtrade mark. iii)In respect of any product9s) sold by Artos, MMB shall be entitled in addition to any tradeor other discount permissible, to a discountequivalent to the amount of royalty whichwould have otherwise been payable asstated above. iv)Under this agreement royalty is payable on all articles manufactured by it. v) Artos shall note use or permit use of theknow-how for any purposes other than for themanufacture of the products at the plant. vi) Artos shall treat as strictly confidential allknow-how and information received directlyor indirectly from MMB and shall not disclosethe same or permit disclosure thereof exceptto Artos personnel on the condition that eachsuch personnel shall be previously bound inwriting to secrecy on condition no lawstringent than those assumed by Artos hereunder. vii)Artos shall manufacture the products at theplant strictly according to know-how andinstructions of MMB and the sampleapproved by them.plant strictly according to know-how andinstructions of MMB and the sampleapproved by them. viii)Artos shall bottle products only under labelsand bottle design and qualities approved byMMB. Artos shall sell the products only atprice(s) in this behalf fixed in consultationwith MMB.”and bottle design and qualities approved byMMB. Artos shall sell the products only atprice(s) in this behalf fixed in consultationwith MMB.” For use of the brand name of MMB and for the technicalassistance rendered by MMB to the assessee formanufacturing beer, the assessee paid royalty to MMB. hereunder. vii)Artos shall manufacture the products at theplant strictly according to know-how andinstructions of MMB and the sampleapproved by them.plant strictly according to know-how andinstructions of MMB and the sampleapproved by them. viii)Artos shall bottle products only under labelsand bottle design and qualities approved byMMB. Artos shall sell the products only atprice(s) in this behalf fixed in consultationwith MMB.”and bottle design and qualities approved byMMB. Artos shall sell the products only atprice(s) in this behalf fixed in consultationwith MMB.” For use of the brand name of MMB and for the technicalassistance rendered by MMB to the assessee formanufacturing beer, the assessee paid royalty to MMB. 4. For the assessment years 1980-81, 1981-82 and1982-83 the Assessing Officer held that the royaltypayments made by the assessee to MMB were in thenature of revenue expenditure and the amount was spentwholly and exclusively for business purposes so as to beeligible for a deduction under section 37 of the Income TaxAct, 1961 (for short ‘the Act’). 5. The view of the Assessing Officer was accepted bythe Revenue and was not sought to be revised by theCommissioner of Income Tax under section 263 of the Act. 6. For the subsequent assessment years, viz., 1983-84to 1988-89 the Assessing Officer came to the conclusionthat the payments made by the assessee to MMB were inthe nature of capital expenditure and therefore theassessee was not entitled to the benefit of Section 37 of theAct. 7. Feeling aggrieved, the assessee preferred an appeal before the Commissioner (Appeals) who was of the viewthat the Assessing Officer had erred in the view that he hadtaken. Relying on a Full Bench decision of this Court inPRAGA TOOLS LTD. v COMMISSIONER OF INCOME TAX[[1]]the Commissioner (Appeals) came to theconclusion that the expenditure incurred by the assesseeon payment of royalty to MMB was in the nature of revenueexpenditure. 8. The Revenue then preferred an appeal before theIncome Tax Appellate Tribunal (for short ‘the Tribunal’) andthat appeal was rejected by the Tribunal. 9. Under these circumstances, the Revenue has comeup in an appeal before us in respect of two assessmentyears and a reference has been made under section256(2) of the Act and in respect of another assessmentyear. 10. While disposing of the appeals in favour of theassessee, the Tribunal held [affirming the view of theCommissioner (Appeals)] that the case of the assessee isfully covered in its favour by the judgment of the Full Benchof this Court in PRAGA TOOLS LTD. 11. Having heard learned counsel for the parties, we areof the opinion that the Tribunal did not commit any error inarriving at the conclusion that it did. 12. In PRAGA TOOLS LTD. the question was more orless similar to the question raised in these cases and it also related to payment of royalty by the assessee, though to itsforeign collaborator. This court referred to ASSAM BENGALCEMENT CO. LTD v. CIT[[2]], wherein the principles laiddown by the Full Bench of the Lahore High Court inBENARSIDAS JAGANNATH, In re[[3]]were affirmed. Thefollowing passage from the decision of Lahore High Courtwas approved by the Supreme Court: 11. Having heard learned counsel for the parties, we areof the opinion that the Tribunal did not commit any error inarriving at the conclusion that it did. 12. In PRAGA TOOLS LTD. the question was more orless similar to the question raised in these cases and it also related to payment of royalty by the assessee, though to itsforeign collaborator. This court referred to ASSAM BENGALCEMENT CO. LTD v. CIT[[2]], wherein the principles laiddown by the Full Bench of the Lahore High Court inBENARSIDAS JAGANNATH, In re[[3]]were affirmed. Thefollowing passage from the decision of Lahore High Courtwas approved by the Supreme Court: “If the expenditure is made for acquiring orbringing into existence an asset oradvantage for the enduring benefit of thebusiness, it is properly attributable tocapital and is of the nature of capitalexpenditure. If on the other hand it is madenot for the purpose of bringing intoexistence any such asset or advantagebut for running the business or working itwith a view to produce the profits, it is arevenue expenditure. If any such asset oradvantage for the enduring benefit of thebusiness is thus acquired or brought intoexistence it would be immaterial whetherthe source of payment was the capital orthe income of the concern or whether thepayment was made once and for all orwas made periodically. The aim and objectof the expenditure would determine thecharacter of the expenditure whether it is acapital expenditure or a revenueexpenditure. The source or the manner ofthe payment would then be of noconsequence.” 13. This court held that the decision of the SupremeCourt in ASSAM BENGAL CEMENT CO. LTD. is an authority for the proposition that expenditure would beproperly attributable to capital if it is incurred for bringinginto existence an asset or advantage for the enduringbenefit of the business. However, if the expenditure ismade for running the business or working it with a view toproduce profits, it would be a revenue expenditure.14. Somewhat more recently, the Supreme Court in EMPIRE JUTE MILLS v. CIT[[4]]held as follows: “There may be cases where expenditure, evenif incurred for obtaining advantage, of enduringbenefit, may, none-the-less, be on revenueaccount and the test of enduring benefit maybreak down. It is not every advantage ofenduring nature acquired by an assessee thatbrings the case within the principle laid down inthis test. What is material to consider is thenature of the advantage in a commercial senseand it is only where the advantage is in thecapital field that the expenditure would bedisallowable on an application of this test. If theadvantage consists merely in facilitating theassessee's trading operations or enabling themanagement and conduct of the assessee'sbusiness to be carried on more efficiently ormore profitably white leaving the fixed capitaluntouched, the expenditure would be onrevenue account, even though the advantagemay endure for an indefinite future. The test ofenduring benefit is therefore not a certain orconclusive test and it cannot be applied blindlyand mechanically without regard to theparticular facts and circumstances of a givencase.” 15. In view of the law laid down on the subject by theSupreme Court, we have now to consider whether the payment of royalty made by the assessee to MMB is in thenature of an expenditure incurred for an enduring benefit ornot. We find that in terms of the Technical AssistanceAgreement, the assessee was entitled to use the know-how supplied by MMB for the manufacture of the products.The know-how and information received by the assesseedirectly or indirectly from MMB was to be kept strictlyconfidential. The assessee was entitled to use the trademark “Golden Eagle” of MMB. The payment of royalty was,therefore, in the nature of expenditure incurred for carryingon business with available know-how rather than foraccretion to the capital base or gain an advantage in thecapital field of the assessee. 15. In view of the law laid down on the subject by theSupreme Court, we have now to consider whether the payment of royalty made by the assessee to MMB is in thenature of an expenditure incurred for an enduring benefit ornot. We find that in terms of the Technical AssistanceAgreement, the assessee was entitled to use the know-how supplied by MMB for the manufacture of the products.The know-how and information received by the assesseedirectly or indirectly from MMB was to be kept strictlyconfidential. The assessee was entitled to use the trademark “Golden Eagle” of MMB. The payment of royalty was,therefore, in the nature of expenditure incurred for carryingon business with available know-how rather than foraccretion to the capital base or gain an advantage in thecapital field of the assessee. 16. In view of the above, there can hardly be any doubtthat the expenditure incurred is revenue in nature and notcapital in nature. 17. We may also recall that for the assessment years1980-81 to 1982-83 the Assessing Officer had himselfcome to the conclusion that the payment of royalty madeby the assessee was in the nature of revenue expenditureand this view was not revised or sought to be revised bythe Commissioner under section 263 of the Act. 18. Under the circumstances, the question of law isanswered in the affirmative, in favour of the assessee andagainst the Revenue. 19. The appeals and reference stand disposed ofaccordingly. (MADAN B.LOKUR, CJ) Dt: 03-01-2012. (SANJAY KUMAR, J) LR COPY TO BE MARKED TNB [1](1980) 123 ITR 773 [2](1955) 27 ITR 34(1955) 27 ITR 34 [3](1947) 15 ITR 185 [4](1980) 124 ITR 1